The terms carbon trading and carbon credits are used in debates about global warming everywhere, but not everyone understands what these terms mean. In the carbon trading system, commercial entities have to adhere to the emission limits of greenhouse gases as fixed by the Kyoto Protocol that decides and allocates these limits across nations to encourage regulated emissions or discourage carbon-intensive methods of operating industries.

Carbon credits are given to industrial units and governments across the world, which allows the owner to discharge a limited quantity of CO2 and other greenhouse gases into the atmosphere. One carbon credit is equal to one thousand kilos of carbon dioxide emissions. This essentially means that high-emission industries can buy carbon credits from low-emission organizations, thereby keeping the total global emissions within the stipulated cap.

The good thing about this system is that businesses and industrial units causing pollution of the environment have to pay for their excesses by means of purchase of carbon credits from the global market. However, this is a quid pro quo trade where selling and buying of carbon credits are done simultaneously by low and high emission firms. Therefore, the world economy remains balanced, while companies least polluting the environment profit financially. This motivates organizations to adopt greener alternatives, and gradually the global rate of greenhouse gas emissions declines.

A company – big or small- that timely opts for a cleaner and greener approach to operating business is sure to be rewarded as carbon credits are traded on the open bourses and can be purchased or sold by anyone. The trading mechanism implies that the benefits to efficient companies are instant and substantial. Moreover, the entire idea has also been expanded to countries, there would always be encouragement to decrease emissions from the national governments to local businesses, which is a huge advantage as several governments are often blamed for absence of initiative on environment.

Other choices like carbon tax are also in place in some countries of the world, which penalises high emission industries instead of financially rewarding the low emission ones. There is a lot of speculation over the efficacy of such systems.

So far carbon trading has been most effective as a method and within a short period has been able to effectively address the issue of high carbon emissions. The efficacy of the system is clear from the unparalleled growth in the carbon trading market witnessed in the past few years.

Discover more about Carbon Credits and Carbon Trading to get a deeper understanding on how you can help in saving the environment.